Pakistan unveils oil storage plan to soothe currency, inventory woes

Pakistan crafted a proposal to encourage overseas crude suppliers to invest in storage facilities and hold inventories for local use as well as for re-export, a move that can ease the pressure on foreign exchange and ensure adequate domestic oil supplies, analysts and trade sources told S&P Global Commodity Insights.

A recent petroleum ministry document showed that since domestic refinery supplies were limited and Pakistan was heavily dependent on imported petroleum products to plug the gap, the move would help to enhance supply access to local oil marketing companies, diversify supply sources, and provide freight economies of scale.

"Foreign suppliers will be allowed to maintain inventories of crude oil and petroleum products in bulk form in their own customs public bonded warehouses located around Pakistani ports, pending its sale to local purchasers or its re-export to other foreign countries," the document showed.

The overseas oil supplier will be allowed to establish a consignee, or a subsidiary company registered in Pakistan, and have bank accounts in the country under relevant Pakistani laws for undertaking operational business activities on behalf of the foreign supplier as well as local purchasers.

"The consignee shall be bound to develop their own dedicated storage infrastructure located around port premises only for storing crude oil and petroleum products, duly licensed by the Oil and Gas Regulatory Authority, under the country's refining, blending, transportation, storage and marketing rules of 2016," the document showed.

Smoother trade operations

The subsidiary company can sell cargoes to licensed purchasers in Pakistan, such as refineries and oil marketing companies, against opening of letter of credit through scheduled banks.

LC confirmation by international banks or advance payment will not be necessary, subject to mutual agreement on the mode of currency and in accordance with applicable foreign exchange regulations.

"The sale and purchase of goods between foreign supplier and Pakistani purchasers will be on purely commercial basis without any liability on the part of the government of Pakistan," the document showed.

Re-exports of crude oil and petroleum products, received for storage in customs pubic bonded warehouses, will be allowed, but the consignee would need to seek prior permission from OGRA, it added.

Analysts and trade sources said the proposal by Pakistan's petroleum ministry to encourage overseas crude suppliers to invest in storage facilities at ports and hold inventories can have several positive implications.

"The move can help to diversify the sources of supply for Pakistan. By attracting overseas crude suppliers to invest in storage facilities, Pakistan can reduce its reliance on a limited number of suppliers and increase competition in the market. This diversification can provide greater stability and flexibility in terms of procurement options," said Sumit Ritolia, senior South Asia oil analyst at S&P Global Commodity Insights.

In addition, allowing foreign suppliers to establish storage infrastructure and maintain inventories can enable the utilization of economies of scale in freight logistics. By storing larger quantities of crude oil and petroleum products, suppliers can optimize shipping arrangements and benefit from cost savings in transportation, analysts said.

"The proposal also outlines measures to streamline trade transactions. The flexibility to allow the subsidiary company to sell cargoes to licensed purchasers without requiring LC confirmation by international banks or advance payment can simplify trade processes and facilitate smoother transactions between foreign suppliers and Pakistani purchasers," Ritolia said.

He added that the decision to allow re-exports would help in efficient management of inventories and give flexibility to foreign suppliers to optimize their operations based on market conditions.

Liquidity issues

Pakistan imports oil primarily from the Middle East through long-term arrangements and spot purchases. However, with a rise in the number of smaller import vessels arriving in the country, it has strained the country's supply chain by leading to congestion at ports and demurrage incidents.

Additionally, difficulties in opening L/Cs by international banks and foreign exchange liquidity issues have further impacted procurement planning.

Pakistan's foreign exchange reserves dropped by $6.4 billion in April to around $4 billion by the end of May, data from the central bank showed. The reserves were barely enough to cover four weeks of imports.

"This new proposal will not impact long term oil supply agreements but it will be beneficial for Pakistan and especially for the oil marketing companies that have to bear foreign exchange and inventory losses," said Yousuf Saeed, head of research at Darson Securities.

In the first 10 months of fiscal year 2022/23 (July-June), Pakistan's petroleum product imports amounted to 8.75 million mt, down 38% year on year and crude oil imports were 6.3 million mt, down 15% year on year, Pakistan Bureau of Statistics data showed.

The ministry's petroleum division sought approval of the proposal from the economic coordination committee and the federal cabinet, which will be chaired by the Prime Minister, the document showed.

Some analysts said such policies worked better in countries where the oil sector was completely deregulated and may have limitations in countries like Pakistan where the government fixes the prices of oil products every 15 days.

"If we really want consumers to benefit and ensure adequate supplies, there is no other way but to deregulate the oil sector," an industry observer said.